EU advises Italy: unite and survive

European Union leaders are pressuring Italy’s rival factions to form a unity government committed to budget rigour after a deadlocked election stirred fears of a quagmire that would reignite the euro debt crisis.

In a message that resonated in Rome, EU President Herman Van Rompuy warned that backsliding on budget discipline and economic reforms would shatter market confidence in the 17-nation currency union’s crisis management.

“Every time we turn a corner, we must keep in mind that just around that corner lies the danger of complacency," he told Estonia’s parliament. “There is no way back. And this we simply cannot afford."

Italy’s stalemate shook European bond markets, with investors moving money from crisis-hit Spain, Portugal, Greece and Italy to the perceived haven of Germany. Ten-year Italian yields rose by the most in 14 months, rising 41 basis points to 4.9 per cent.

As leaders of Italy’s two rival blocs, Democratic Party chief Pier Luigi Bersani and former prime minister
Silvio Berlusconi
, weighed their options, European officials alternated between pleading with them to craft a stable government and fretting that they won’t manage it.

The comedian-turned-politician Beppe Grillo, whose 5 Star movement was the top vote getter of any single party with his message repudiating austerity and calling for a referendum on the euro, rejected a coalition with anyone.

“This is a catastrophe for Europe," said Luxembourg Foreign Minister Jean Asselborn. “Italy won’t get out of this financial and economic crisis without a serious plan. This won’t happen with populism or by misrepresenting things."

Mr Berlusconi, a three-time prime minister ousted in November 2011 during an escalation of the debt crisis, picked up a blocking minority in the upper house. EU Economic and Monetary Commissioner Olli Rehn called it “important to get a functioning government in Italy".

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Since the financial turmoil broke out in late 2009, voters in Greece, Ireland, Portugal and Spain – the four countries tapping emergency aid – have installed governments that follow Germany’s budget-cutting prescriptions, although it took Greece two elections and the threat of euro expulsion to do so last year.

In those elections, voters bought the German argument that deficit control and the euro go hand in hand. Now the risk is voters will equate the currency with mass unemployment.

After three years of recession and austerity, southern Europe is sitting on a social powder keg, with 2013 unemployment set to reach 11.6 per cent in Italy, 17.3 per cent in Portugal, 26.9 per cent in Spain and 27 per cent in Greece, according to European Commission forecasts.

Italians broke the pattern of compliant electorates by resurrecting Mr Berlusconi and flocking to Mr Grillo, a political upstart who calls established leaders “failures".

It was a protest against politics-as-usual and economic distress, with voters susceptible to populist fancies and promises like the property tax giveaway that the 76-year-old Mr Berlusconi used to curry favour.

The principal loser, outgoing Prime Minister
Mario Monti
, incarnated the Brussels-to-Berlin consensus that has dominated the debt-crisis response. A 10-year veteran of the EU Commission, the technocratic Mr Monti was appointed in November 2011 to bring order to the budget after Mr Berlusconi refused to do so.